Unemployment in the US and UK is over 8% and in many Eurozone countries is far higher. This column argues that we can’t just blame the recession – this is also symptomatic of long-term trends that, without a concerted effort by policymakers, will continue to stunt growth, deepen income inequality, weigh on public budgets, and cause living standards in many countries to stagnate.

Three years after the official end of the 'Great Recession', millions of workers across advanced economies remain unemployed. The US and UK unemployment rates remain above 8%; among Eurozone countries, unemployment exceeds 10% (US Bureau of Labor Statistics[1]). This reflects not only the weakness of the recovery – and renewed recession in parts of Europe – it is also symptomatic of long-range trends that will continue to prevent a return to full employment and, left unaddressed, could inhibit growth in the advanced economies and, very soon, in China as well.

In a recent report with colleagues at the McKinsey Global Institute, we analyse the global labour market, and the trends and challenges that policymakers and business leaders need to tackle (Dobbs et al. 2012).

Skills mismatch

There are growing mismatches between skills that employers demand and skills available in the labour market. For the past three decades, technological advances and business process improvements have reduced demand for low-skill labour in advanced economies. Factories have many more machines and far fewer workers. Routine transaction and office tasks have been automated or eliminated. Yet, even in a soft job market, employers in the US and Europe say they can’t find enough high-skill workers to fill some open positions.

This imbalance is seen in today’s unemployment numbers and in the long-term divergence of income growth between high- and low-skill workers.

Unemployment rates for US university graduates only briefly exceeded the 5% 'full employment' level in the wake of the worst recession in the postwar period.

Unemployment for workers with only high school diplomas is still above 8%.

Not only do university graduates find more jobs, but they enjoy faster wage growth. From the 1960s to 2008, real wages of US workers with university degrees rose at about 1.1% annually; for high school graduates pay rose by 0.4% annually; for high school dropouts real wages have not risen at all. As MIT economists Daron Acemoglu and David Autor reported last year in the Handbook of Labor Economics, the wage premium that a university graduate commands over a high school graduate is paid has jumped from 1.7 times to 2.8, helping to widen the US income gap (Acemoglu and Autor 2012).

Ageing will exacerbate mismatches in most advanced economies

In our latest research, we estimate that the growth of the global labour force will slow by nearly a third in the coming decade, from 1.4% annually to about 1% annually through 2030 (Dobbs et al. 2012). Most of that growth will occur in developing economies; in advanced economies, labour force growth will average about 0.3% and in some places, such as southern Europe where the population is ageing rapidly and birth rates are low, labour forces are likely to shrink.

Despite a rising share of young people earning university degrees, many ageing economies are likely to bring fewer workers with tertiary education (a proxy for 'high skill') into their labour forces in the next ten years than they did in the previous ten.

We project that this could leave advanced economies with 16 million to 18 million fewer university-educated workers than will be demanded in 2020, or an 11% gap – potentially placing a drag on GDP growth.

Ageing will also have a serious impact on China, which will need tens of millions more university graduates to support its drive into higher value-added activities to achieve its growth goals.

We estimate that, based on the current trend, China could face a shortage of 23 million university-educated workers by 2020.

To avoid this skill gap, China would need to raise the number of secondary school students attending university to 80% (South Korea’s level) in the next three years.

Ageing will slow the growth of the global labour force, raising the 'productivity imperative'

Ageing in many advanced economies and in China, will reduce growth in the global labour force from about 1.4% annually to about 1.0% through 2030. Across advanced economies, growth rates will fall to about 0.3% annually and China’s labour force growth is likely to fall by half to about 0.5% annually. To sustain GDP per capita growth, ageing advanced economies such as Germany would need to raise productivity growth by 30%; southern European economies would have to double productivity growth. These productivity goals could be reduced by labour force growth, which can be achieved with higher participation rates of older workers and women (in some countries) and immigration. If productivity growth and labour participation rates can’t fill the gap, per capita GDP gains would cease and workers in the next generation could grow up poorer than their parents.

Figure 1. By 2020, advanced economies and China could have too few university-educated workers

Notes: Gaps are % of demand for shortages, and % of supply for surpluses. Numbers may not sum due to rounding.

Sources: United Nations Population Division (2010 revision); IIASA; ILO; Global Insight GDP consensus estimates; country sources for the US and France; China National Bureau of Statistics; McKinsey Global Institute analysis.

How should policymakers react?

How countries cope with potential labour-market mismatches depends on the age, education, and relative productivity of their workers. The skill gaps that MGI describes are notional – they would only appear if current trends persist, and if the labour market does not self-correct through, for example, changes in wages. However, these projections do indicate the magnitude of the potential problems building in global labour markets.

To pinpoint where the need for action may be most critical, we plot nations by age of working age populations and average educational attainment levels. This shows how various nations are positioned for the challenges of the next 20 years. In the eight clusters of countries on the chart below, we see that many high-income countries (the 'ageing advanced' cluster) have the oldest populations and will have a relatively difficult time producing enough university-educated workers from purely domestic sources to avoid shortages. The southern Europe cluster is not quite as old, but has lower educational attainment, which also poses a challenge. The US, which has a relatively young and fast-growing population compared with other advanced economies, is less vulnerable and could face a nominal shortage of only 1.5 million graduates.

India and 'young developing' nations in Africa and south Asia have very young populations (the average age of working people is under 25) and will be major contributors to global labour force growth. These nations have more time to head off gaps, but face a short-term challenge to produce enough secondary school graduates to support industrialisation.

Figure 2. Global labour markets fall into eight clusters, each distinctly positioned in terms of age profile and educational attainment

To avoid labour market mismatches will require revolutionary improvement in the capacity of educational and training systems. Advanced economies would need to raise the growth rate in the number of young people finishing university by a factor of 2.5 to fill even half the projected gap in high-skill workers. This is unlikely to happen by simply expanding the capacity of existing universities. To raise capacity this quickly will also require innovations in how courses are taught – with more widespread use of virtual lectures and interactive online formats. Even then, advanced economies would still face a gap of nearly ten million high-skill workers. Raising the labour participation rate of university-educated women keeping highly educated older workers on the job could help; 38 million high-skill workers over the age of 55 are projected to leave the global labour force by 2030.

New approaches to low-skill-job creation

In both developing and advanced economies, new approaches will be needed to create jobs for low-skill workers. Even a revolution in education that shifts millions of workers into the university-educated/high-skill category will leave growing surpluses of lower-skilled workers that would likely face unemployment or underemployment. In both advanced and developing countries, it will be necessary to raise demand for low-skill workers. In advanced economies, the rate of job creation for such workers would need to jump by a factor of five to seven times.

Targeted vocational training tracks in secondary schools and retraining programs for mid-career workers in fast-growing healthcare services are one ways.

Another is 'marketisation' of household work such as cooking, cleaning, childcare, etc.

These jobs can be organised and shifted from a part-time, off-the-books basis to full-time jobs with training, placement services, and even career paths. Sweden and Germany have shown that with proper incentives (e.g., tax breaks for employers), this can create many jobs for low-skill workers. Developing economies can employ less skilled workers by encouraging labour-intensive export sectors and moving up the value chain (there are more jobs in preparing processed food for export than in exporting grain, for example).

Conclusion

The persistently high levels of unemployment in the wake of the Great Recession have illuminated trends in global labour markets that have been building for decades. It is increasingly apparent that the forces that are creating the mismatches in the labour market and are impeding re-employment of millions of workers will not be reversed by economic growth alone. Moreover, without a concerted effort by policymakers and business leaders to invest in the training and education that is required for the jobs that will be created, growth itself will be at risk, income inequality will deepen, public budgets will be under even greater stress, and advances in living standards may cease in some countries. These are outcomes no nation can afford.

References

Acemoglu, Daron and David Autor (2011), “Skills, Tasks and Technologies: Implications for Employment and Earnings”, Handbook of Labor Economics, 4(B):1043-1171.